In the context of the ongoing uncertainty for financial markets, it is worth highlighting just how much the present economic and stock market trends contrast with those of the last decade or two. The UK and US central banks are now raising interest rates progressively, to actively depress demand for borrowing by making it more expensive and bring demand back into line with their ability to supply. Overlaying this, sanctions are being imposed on Russia in the knowledge they will dynamically inhibit the prospects for all other global economies. Over coming quarters, we expect trading conditions to become a lot more challenging for many companies.
Prior to the current period, when financial stimulus and global growth were abundant, it was the share prices of higher-risk businesses with bold growth plans that outperformed. More recently, steadier businesses offering attractive streams of dividend income have started outperforming, these types of businesses are known as cash compounders.
Companies that are held in the Miton UK Microcap Trust (LON:MINI) portfolio are selected for their ability to generate imminent cash on capital expenditure. In a way, in our minds we equate them with ‘immature’ income stocks (companies starting to pay a divided or who plan to in the future). If anything, we believe their advantages are even more exciting than mainstream cash compounders, because smaller companies often serve immature markets, where expansion is less reliant on global growth. Furthermore, we believe their share prices are somewhat overlooked currently given that geopolitical events are hogging investors’ attention.
In our view, this is a vital moment for investors. Quoted companies with strong balance sheets are particularly fortunate in this environment because they can source additional capital from institutional shareholders even when economic and market trends are unsettled, and hence keep investing. Importantly, businesses with the potential to generate abundant cash surpluses have major advantages at a time when fewer businesses can fund capital expenditure.
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